Renewable Rules and Markets: A California Perspective October 2, 2008 Nancy Ryan Chief of Staff, Office of Commissioner Peevey California Public Utilities Commission
Outline Renewable energy incentives in California Rationales Status Lessons Learned Case Studies in renewable incentives Tradable renewable energy credits: when policy rationales conflict Learning-by-doing: a rationale for the California Solar Initiative Meeting the challenges of system and policy integration 2
Renewable Energy Policies in California a long story 3
Current Renewable Energy Policies 4 Renewable Portfolio Standard: mandates 20% delivered energy from renewable sources by 2010. California Solar Initiative: subsidizes up to 3000 MW of solar PV installations Self Generation Incentive Program: $83M/year for small scale wind and fuel cells.
Rationales for Renewable Energy Incentives 5
6 Renewable Energy Policies in California: The Current RPS Program Rationale for California s RPS, according to SB1078: (b) Increasing California s reliance on renewable energy resources may promote stable electricity prices, protect public health, improve environmental quality, stimulate sustainable economic development, create new employment opportunities, and reduce reliance on imported fuels. (c) The development of renewable energy resources may ameliorate air quality problems throughout the state and improve public health by reducing the burning of fossil fuels and the associated environmental impacts. No explicit reference to greenhouse gas mitigation or climate change anywhere in the statute.
Expanding the RPS to 33% is now a leading GHG reduction strategy AB 1489: "The Legislature finds and declares that the State Air Resources Board has identified a statewide 33 percent renewables portfolio standard as a key measure to comply with the requirements of the California Global Warming Solutions Act of 2006." 7
CARB is counting on an expanded RPS for about 1/8 of statewide GHG reductions Total Reductions from 2020 BAU: 169 MMTCO 2 E Transportation Mandates Electricity/Gas Mandates: 49.7 MMTCO 2 E 33% RPS 21.2M Other Mandates Energy Efficiency 26.4M CSI 2.1M 8 Cap and Trade Source: CARB Draft Scoping Plan
Renewables are an expensive GHG mitigation measure CO2 Supply Curve of Incremental Low-Carbon Resources (Net LSE Cost per Tonne CO2e) $250 $200 Biomass Levelized Cost $/tonne $150 $100 $50 $- $(50) EE Biogas Export CHP Wind Geothermal Solar Thermal Hydro - Small $(100) CSI 9 $(150) - 5.0 10.0 15.0 20.0 25.0 30.0 35.0 Reduction in CO2 from Reference Case (MMT CO2e) Source: Energy and Environmental Economics
California s Current RPS Program Status and Lessons Learned 10
RPS procurement process is working Process emphasizes competitive solicitations with a focus on long-term contracts key to project financing CPUC has approved 95 contracts for 5,900 MW for new and existing RPS capacity 61 are contracts with new projects, totaling 4,480 MW Were all approved capacity online by 2010, would more than achieve RPS target. Response to RPS solicitations robust and increasing, one indication that the market is maturing 2008 RFO: IOUs have short-listed ~10 times their incremental annual requirement 11
Project development has been slow Only 14 contracts for ~400 MW have come online; need about 3,000 more new MW in next 2 years for IOUs to meet 20% in 2010 RPS generation has not kept pace with overall load growth 2003 2004 2005 2006 2007 PG&E RPS-eligible GWh RPS GWh as % of bundled sales 8,828 12.4% 8,575 11.6% 8,543 11.7% 9,114 11.9% 9,047 11.4% SCE RPS-eligible GWh RPS GWh as % of bundled sales 12,613 17.9% 13,248 18.2% 12,930 17.2% 12,706 16.1% 12,465 15.7% SDG&E RPS-eligible GWh RPS GWh as % of bundled sales 550 3.7% 678 4.3% 825 5.2% 900 5.3% 881 5.2% TOTAL RPS-eligible GWh RPS GWh as % of bundled sales 21,991 14.0% 22,500 13.9% 22,298 13.6% 22,719 13.2% 22,393 12.7%
Transmission a major barrier to RPS project development Risk Factors for 2010 RPS Generation 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% % of 2010 Generation Affected PTC/ITC Transmission Developer Financing Site Control Permitting Price Reopener Military Radar Technology Fuel Supply Equipment Procurment 13 Note: California has little control over this barrier
MPR represents the presumptive cost of building and operating a combined cycle gas turbine power plant (CCGT) under a long-term contract RPS contracts at or below MPR will be considered per se reasonable, and can be recovered in rates Original law authorized CEC to allocate and award supplemental energy payments (SEPs) to cover above-mpr costs of long-term RPS-eligible contracts executed through competitive solicitations Clean-up legislation now allows the CPUC to approve above-mpr contract costs, for recovery in rates, up to a cost limitation If the cost cap is met, IOUs can limit RPS procurement to renewable energy resources that can be procured at or below the MPR CPUC is now developing rules on how to efficiently and effectively administer above-mpr funds 14 Market Price Referent (MPR)
15 Expanding the RPS to 33%
Renewable Energy Policies in California: Expanding the RPS goal to 33% by 2020 Stakeholder issues to be addressed Enhance project viability Cost containment Some proposals on the table Eliminate MPR and replace with Feed-in tariffs different levels for different technologies Alternative compliance payments Eliminate least-cost-best-fit criterion Move toward integrated resource planning 16
Tradable RECs: What happens when policy rationales conflict? 17
TRECs An Illustration Null Power RECs 18 Brown Power
WECC Potential Renewables Alberta mixed Renewables B.C. Wind and Small Hydro Geysers Geothermal Mojave Solar Montana Wind N.E. California, Oregon, Nevada Geothermal and Wind Pacific NW Wind Salton Sea Geothermal Solano County Wind Tehachapi Wind Wyoming Wind 19 Wind Wind Wind Geo Wind Geo Geo Wind Small Hydro Wind Wind Solar Geo Mixed Renewables Wind Wind 19
So many objectives Clean California s Air Promote in-state growth and jobs Grow the Industry Contain Program Costs Gas Price Hedge 20 Reduce GHG Emissions
TRECs: a cheaper, more flexible route to the green future? Help overcome transmission issues by building in noncongested areas Encourage renewable development Facilitate compliance, especially for retailers with fluctuating or small future loads Lower compliance costs by tapping least expensive resources More competition, higher liquidity, contracting flexibility can further reduce compliance costs 21
TRECs: Scourge of green power? Jobs, growth and environmental benefits go to other states Gas price hedging benefits are lost when the green power is unbundled from the REC Compliance costs will rise but no new projects will get built??? 22
The California Solar Initiative: Learning-by-doing as a Policy Rationale 23
California Solar Initiative Goals 3,000 MW of new customer-owned distributed solar Self-sustaining solar industry free from ratepayer funded incentives Budget $3.3 billion budget (2007-2016) Split between different utility areas 24 Long-term policy framework Uniform incentive eligibility guidelines statewide Incentives based on solar performance Incentives decline based on program demand Photo: Ericson Solar, Residence of Charles and Debbie Mckeown, Placerville, CA; California Solar Initiative Funded System installed Spring 2007, 9.7 kw, nstaller: Ericson Solar
25 Incentives decline as demand grows: CPUC part of program has a goal of 1,740 MW
339 MW PV installed thru June 2008 26 Source: 1981-2007 data from statewide database of California Energy Commission's Grid Connected PV Capacity Installed in California, April 1, 2008. 2008 Installed MW are through June 25, 2008 for CSI only.
Learning-By-Doing Spillover Benefits as Justification for CSI Subsidies Van Benthem, Gillingham and Sweeney, Learning-by-doing and the Optimal Solar Policy in California * Environmental externalities alone cannot justify large subsidies to renewable energy, including PV LBD creates a positive externality Increased production by a given firm today lowers the industry s future production costs The savings spillover to other firms and their customers Without subsidies early actors may not produce the social optimal level of output LBD benefits in California Not from panel manufacture CA a small actor in a global market Balance-of-system (BOS) costs are a local phenomenon Installation, marketing, managing installations, supply chain Empirical Question: are LBD benefits in BOS sufficient to justify the CSI subsidies? 27 * Energy Journal, July 1, 2008.
VGS s empirical findings Under baseline assumptions CSI is remarkably close to economic efficiency-optimizing policy. It appears there is an economic rationale for solar subsidies in California Findings are robust to most key parameters: Most sensitive to natural gas price growth rate Less so to residential borrowing rate Even modest LBD yields cost changes that justify the CSI subsidies 28
Planning for a renewable future: the challenges of integration 29
Motivation: Projected RPS Needs 30 100 Renewable Energy Generated Statewide ( '000 G W h) 80 60 40 20 0 Total: 29,000 GWh (11% Renewables) Gap Small Hydro/Ocean Solar PV SolarCSP Biomass Geo Wind 2010 Tot: 59,000 GWh (20% RPS) GAP 2020 Tot: 99,000 GWh (33% RPS, CSI, BI) GAP 2004 2010 2020 Data Sources: 2004, CEC Electricity Report which includes all renewables in the State, not just IOUs; 2010 and 2020, PIER Renewables Projections. 30
Intermittent Resources Are Likely to Dominate IOU RPS Generation by Fuel Type GWh/yr 80,000 66,271 60,000 40,000 35,856 20% of Expected IOU Retail Sales 33% of Expected IOU Retail Sales expiring (fuel unknown) solar wind geothermal 20,000 0 2003 2005 2007 2009 2011 2013 2015 2017 2019 small hydro bioenergy 31
Geo Geo Wind Geo Solar/PV Potential Future Transmission Corridors in California Geo Wind Wind Biomass Geo Solar Wind Wind Solar 32 Source: California Energy Commission Solar Geo 32
California Public Utilities Commission RETI Relationships 33 33
Possible Cases to Run for 33% RPS Portfolio Analysis 1. Reference case: Existing policy, medium gas prices, medium CO2 prices, etc. 2. High wind case: Probably the base case for 33%, depending on resource cost data 3. High CSP case: Market transformation reduces cost of central station solar thermal 4. High distributed resource case: High efficiency plus market transformation reduces cost of PV 5. Out-of-state case: Maximum reliance on RECs and remote renewables 34
Interaction with AB32 Program: Policy Integration How should the GHG emissions cap and trade program interact with renewable programs? Who gets credit for the avoided emissions? Should renewable generators receive allocations of allowances? Should TRECs include emissions reductions attributes of renewable facilities? Will climate policy drive energy policy? 35
Contact information Nancy Ryan Chief of Staff, Office of Commissioner Peevey California Public Utilities Commission Email: ner@cpuc.ca.gov Phone: (415) 703-1823 36